HOME EQUITY INVESTMENTS AND REVERSE MORTGAGES — UNDERSTAND THE DIFFERENCE
For senior homeowners wishing to gain access to their own housing wealth, a newer financial product gaining some attention is the HEI, or Home Equity Investment, different from a reverse mortgage in several significant ways. A “shared appreciation product”, an HEI lets homeowners get cash out of the equity in their home, but there the similarities seem to end.
Eligible borrowers
HEIs, which are equity-share contracts, not loans, may be issued to younger homeowners; the minimum age for reverse mortgages is 55. Homeowners receive cash today, then owe back that cash plus a percentage of their home’s appreciation (and sometimes a share of existing equity) at settlement.
Repayment timing
Reverse mortgages are designed for long-term stays. In fact, there is no fixed repayment date as long as sale or refinance is mandatory. HEI agreements give the provider a lien against the home equal to a specified percentage of the home’s value (that may be as high as 70%), due at the pre-specified fixed term (whether the homeowner still wants to remain in the home or not. If the homeowner has an existing mortgage, those payments will need to be made (reverse mortgage borrowers have no requirement to make monthly mortgage payments).*
Repayment amount
Although interest and fees accrue on reverse mortgages, most are non-recourse loans, meaning that the homeowner or their heirs can’t owe more than the value of the home when the loan becomes due. In contrast, as the California government consumer protection website explains, an HEI “partnership” may not be equal. “For example, the HEI provider may pay you 10% of your home’s current value but later require you to repay that amount plus 25% of your home’s future appreciation.” That means that if, at the end of the term, the home has appreciated substantially, the homeowner may end up owing a substantially higher loan repayment. But even if the home does not appreciate, an HEI may require homeowners or their heirs to repay much more than the original amount.
Regulation
Reverse mortgages are regulated by the Federal Housing Authority (FHA) and provided by approved lenders. Home equity investments (HEIs) are primarily regulated at the state level, as they are not governed by federal credit laws. If passed, the Home Equity Lending Integrity Act would regulate home equity investment products, including subjecting HEIs to requirements under the Truth in Lending Act.
Accessing their housing wealth, either through an HEI or a HECM reverse mortgage, can help senior homeowners achieve many different financial goals, but it’s important that you help your clients understand how the two options differ in durability and in levels of risk.
https://mutualreverse.com/david-garrison
*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org
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